IMF Chief Lagarde Warns of Housing Crash in the UK
On Thursday, June 23, 2016, Britons will be voting on whether to remain part of the European Union. This historic vote has far-reaching implications for the UK economy, the European economy and the global economy. The May inflation report released by the UK government was none too flattering. It indicated that GDP growth in Q1 2016 had declined, and the projection for GDP growth in Q2 2016 will be equally dull. Even in the absence of a Brexit, the UK economy is slowing and precariously balanced. This is evidenced by declining sentiment among consumers and producers.
People are simply taking a risk-off approach in the run-up to the vote, delaying big-ticket purchases and investments as the UK economy slowly winds down. Presently, the general consensus is that the remain campaigners will get their way by a slim margin. Prominent politicians and policymakers wanting to remain as part of the European Union include the IMF Chief Christine Lagarde, Prime Minister David Cameron, Chancellor of the Exchequer George Osborne and company. The former London mayor, Boris Johnson, has been supported by key Tory members who are also pushing for a break from the EU. But it was the Friday, May 13, visit by Christine Lagarde that drew the most attention.
What is the State of the UK Housing Market?
All sorts of economic data has been released of late, indicating that the general trend for housing in the UK is negative. For example, the construction output has declined by 4.5% and housing starts are down at 31,000 while the housing index for April is at 687 points; it was 692 points in March. Equally important is the decline in mortgage approvals between February and March 2016 from 73.2 thousand to 71.4 thousand. Another measure of the health of the housing market is construction PMI. This index declined from 54.2 in March to 52 in April.
Various analysts in the property market in the UK have seen negative trends taking place over the past several quarters. For example, 40% of every 100,000 homes that are purchased in the UK every month are purchased with cash and not credit. But more importantly, home sales in the city of London are 20% down year on year.
The IMF Address and the Broader Implications
The IMF chief gave her annual address on the UK economy, and despite the fact that the IMF is funded by the UK and the European Union, her comments about the UK housing market were designed to instill fear in a Brexit vote. The IMF believes that prospects for the UK economy are somewhat negative even in the absence of the Brexit referendum.
Presently, it appears that the UK is entering a period known as a technical recession. This indicates that there are two successive quarters of GDP declines in the broader economy. But the reason for Lagarde's bearish outlook for the UK economy is predicated on the broader economic implications of a Brexit. At a time where the global economy is anything but stable, further destabilization in the form of the breakup of the EU will send shock waves through the West, emerging markets and opposing forces. For this reason, NATO and the Western countries do not want to see any weakening of the European Union.
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